Kestra Advisory Services and Kestra Private Wealth Services, two investment advisors under the parent company Kestra Financial, will pay more than $10 million in fines after settling charges with the Securities and Exchange Commission.
According to two SEC orders filed on Friday, the Austin, Texas–based advisory firms (with cumulatively more than $35 billion in regulatory assets under management) settled charges that they failed to disclose compensation their affiliated broker/dealer received after investing client assets into certain mutual funds and mutual fund share classes, even when more affordable options were available.
“Certain of the mutual funds that paid revenue sharing were more expensive than lower-cost options available to clients, including instances when there were lower-cost share classes of the same mutual funds available to clients that did not result in any revenue sharing,” the order against Kestra Advisory Services read.
Mutual funds will often offer different types of share classes; these can include the same portfolio of securities with identical objectives but have different fee structures. In such a situation, clients usually (though not always) benefit more from investing in the share classes that do not charge additional fees. Some mutual funds also pay recurring fees to a clearing broker to have their share classes included in that broker’s mutual fund programs. In the case of the Kestra firms, their affiliated broker and an unaffiliated clearing broker had an agreement in which they would share the revenue from those recurring fees.
Additionally, according to the SEC, there were situations in which the clearing broker would not charge a transaction fee for the sale of certain mutual funds but did charge fund families a greater recurring fee in order to not have those transaction fees included. Therefore, share classes in this program tended to have higher expense ratios than others. The order stated that Kestra’s affiliated broker had a revenue sharing agreement with the unaffiliated broker, in which it would share a portion of this recurring fee.
Additionally, the affiliated brokers’ fees tended to include a $20 markup.
The SEC argued the two firms had a fiduciary duty to disclose these potential conflicts that could impact the advice they offered clients. Particularly, the firms were incentivized to recommend share classes resulting in the affiliated broker getting revenue sharing, but failed to disclose this to clients, according to the orders. Before July 2016, the firm did not disclose the affiliated broker received any revenue sharing at all, the commission claimed.
"The Kestra companies cooperated with the SEC throughout the course of the investigation and are pleased to have reached a resolution of the matter," Kestra President Stephen Langlois said about the settled charges.
As a part of the settlement, the Kestra firms agreed to a cease-and-desist order, as well as a censure, and promised to distribute funds to investors, though they did not admit or deny the SEC allegations. Kestra Advisory Services agreed to pay disgorgement of $7,229,802, as well as prejudgment interest of $1,273,370 and a penalty of $1.5 million, while Kestra Private Wealth Services would pay disgorgement of $208,187, prejudgment interest of $31,382 and $60,000 in a civil penalty.